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Why French carmakers are real winners of Iranian protectionism

While Iran's steep import tariffs for vehicles are ostensibly designed to protect local industry, it appears that the primary benefactors are French carmakers.
An Iranian technician sits in a Peugeot 206 car on the final production line at the Iran Khodro auto plant, west of Tehran, on February 20, 2016. / AFP / BEHROUZ MEHRI        (Photo credit should read BEHROUZ MEHRI/AFP/Getty Images)

Iran’s auto industry is only second to its energy sector, accounting for some 10% of the gross domestic product and 4% of employment. Showcasing the Islamic Republic’s efforts to become an industrial economy, it is protected by high tariffs on car imports. However, it is time to ask who benefits most from these tariffs. Indeed, while the trade barriers are ostensibly introduced to protect Iranian automakers, it appears that the primary benefactors are French carmakers who have clearly found their niche in the largest auto market in the Middle East. In this equation, Iranian consumers are ultimately paying for the government’s protectionist policies.

Iran imposes a complicated system of tariffs and taxes on car imports, varying from 40-55% depending on the vehicle type. The government adds a 9% value added tax (VAT) and levies an additional 4% overall sales tax. As such, an Iranian consumer may pay customs and taxes amounting to as much as 80% of the value of an imported vehicle to be able to drive it on Iran’s hazardous roads and Tehran’s traffic-jammed streets.

The government’s rationale — supported by domestic automakers — is simple: Iran’s car industry is still in its infancy and must be protected from technologically superior foreign competition. Iran’s car manufacturing industry is the largest in the Middle East and North Africa and the 13th largest in the world, and the country counts 13 active automakers. Yet, the relatively large number of automakers does not mean that the market is competitive.

Indeed, only two firms account for 94% of total output: Iran Khodro Corporation (IKCO) and SAIPA. IKCO has joint venture and license production agreements with French automakers Groupe PSA and Renault. The deals involve local production and assembly of Peugeot and Renault cars, which are exempt from import tariffs. As such, through its agreements with local automakers, PSA and Renault are in effect bypassing Iran’s stringent trade barriers.

IKCO’s production and sales of French vehicles is significant — and growing. Figures show that IKCO output increased by 30.8% in 2016. Of the close to 400,000 cars it produced last year, 94,474 were a version of the Peugeot 206; 97,959 units were different types of the Peugeot 405; and 78,703 were a version of the 405, known as Peugeot Pars. In total, cars produced in partnership with PSA constitute a whopping 70% of IKCO’s production.

Separately, Pars Khodro produces the Renault L90 — called Tondar — and Megane. Pars Khodro has also seen an astonishing increase in its sales and production, which increased 190% last year. Compared to IKCO and SAIPA, Pars Khodro is much smaller, producing less than 5% of total output.

Based on figures circulated in Iranian media, PSA and Renault’s market share in Iran is as high as 33%. The Iranian market is at present estimated at one-third the market size of Germany. Therefore, it is little wonder that Iran is globally significant for the business strategies of PSA and Renault. The fact that both of these firms face fierce competition elsewhere in the world only adds to Iran’s significance.

Protected by high import tariffs and pressed to satisfy domestic demand, IKCO has actively sought cooperation with French carmakers, with the French eager to oblige for their own reasons. IKCO CEO Hashem Yekkeh Zare quietly traveled to France in the spring of 2015 to negotiate deals with PSA executives. The French executives continued negotiations in Tehran the following summer. As such, PSA and Renault were largely prepared when the nuclear deal was implemented in January 2016. Their joint venture agreements with Iranian automakers provide them with the access to a market where tariffs bar the competition.

Gauging Iran’s market, French automakers have reasons to feel secure: Their cars are cheaper than imported cars and are of higher quality than the local products. Iran’s high import tariffs encourage luxury car imports and not innovation in car manufacturing. From March 2016 to February 2017, Iran imported 61,245 vehicles valued at 1.5 billion euros ($1.6 billion) — or an average of roughly 25,000 euros ($27,000) per car. Adding import tariffs, VAT and overall sales tax, it is clear the price tag is unaffordable for the working and middle classes. Indeed, based on Ministry of Labor directives, a common laborer earns $230 per month.

SAIPA, the other major car manufacturer in Iran, produces versions of Kia Pride in massive numbers, priced at around 5,200 euros ($5,600). However, its poor safety performance means many Iranian consumers prefer a sturdier option. Given that Peugeot and Renault cars have the upper hand in quality compared to SAIPA Prides, IKCO and Pars Khodro can charge a mark-up; a Peugeot 206 or 405 is priced at around 8,000 euros ($8,600), and with added options, can cost up to 12,000 euros ($12,900). A Megane can go for as high as 25,000 euros. Although more expensive than Iranian domestic designs, these cars are still less pricey than imported vehicles. The price gap is protected by high tariffs, turning this market segment into a monopoly for French automakers. In short: Some foreign carmakers are benefiting from their market position in Iran to boost their global standing.

The Iranian market is significant for French carmakers such as PSA. Incorporating sales from its joint ventures and license agreements in Iran, it last year recorded a 5.8% increase in sales and deliveries globally. Without the Iranian market, its sales would have been down by 2% compared to 2015. As such, PSA’s increased sales in Iran propelled its overall growth, securing its market position. Moreover, PSA recently acquired General Motors’ OPEL, a car popular in Iran during the 1990s, to become Europe’s second-largest automaker. As such, the Iranian market boosts PSA’s position as a major car exporter. 

In this vein, other European car manufacturers are following the French model in bypassing import barriers in Iran. Germany’s Volkswagen has discussed plans to launch an assembly line Iran, in a joint venture with private carmaker Mammut Kodro. However, the road from talks to an actual presence in the Iranian market is long. For now, Iran remains the domain of French automakers, with tariffs to protect their Iranian partners ending up securing a monopoly for foreign partners.

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